Debt Relief and Nigeria - To Emit or not to Emit $12 billion


Mobolaji E. Aluko, PhD
Burtonsville, MD, 20866, USA

August 22, 2005


After much hoopla and many cerebral and not-so-cerebral altercations in the media between government officials (notably President Obasanjo, Finance Minister Dr. Okonjo Iweala, presidential spokesperson Mrs. Remi Oyo, DMO Director Dr. Mansur Mukhtar, etc.) and non-governmental citizens (journalist Simon Kolawole, economist Dr. Chu Okongwu, lawyer Dr. Mudiaga Odje, etc.), the implications of the recent announcement (on June 29, 2005; see announcement below In Appendix I) inviting Nigeria to begin new debt relief terms negotiations with Paris Club members ?up to Naples terms? (for terms see below in Appendix II) has gradually began to sink in. It is now reduced to whether Nigeria will indeed take the most loud offer on the table: that is an immediate payment of $6 billion arrears, a more spread-out payment of another $6 billion within a year (which amounts to a discounted buy-back), following which the rest of the $18 billion out of a $30 billion Paris Club debt would be considered forgiven, and Nigeria would then ?exit? from the club of Paris Club debtors.

While conceding that this is the first time that outright partial debt cancellation with possibilities of rescheduling the remainder with an early exit option is part of the terms being discussed with Nigeria, this is currently what is being described, prematurely in many respects, as having ?received? a 60% debt relief ? paying off $12 billion instead of $30 billion. [See Appendix III of history of debt treatments for Nigeria; earlier Classic ($7.3 billion in 1986; $5.7 billion in 1989) and Houston terms ($3.326 billion in 1991 and $23.4 billion in 2000) had only debt rescheduling, no debt cancellation/reduction].

All of this is within the context that Nigeria currently has a hefty foreign reserve of $24 billion, and the promise of continuing international sky-high crude oil prices for an oil-and-gas-rich country like Nigeria for some time to come ? ?exceptional revenues? all around, without an equal concern for ?exceptional needs.?

The above, in a nutshell, is where we are, and if anyone knows differently, let ?em say so.

Grounds for Euphoria

The euphoria with which the invitation to negotiate was received by the Nigerian government and many Nigerian citizens, including some in the media, was understandable, bearing in mind much skepticism leading up to the sudden announcement, despite the enormous globe-trotting on its quest that the President had embarked upon for the last six years. Anthropomorphically, one can equate the development to a childless couple being told after fifteen years of seeking a child and going to every reproductive health expert imaginable (both modern and traditional), that the woman has finally taken in and that all things being equal, in nine months a healthy baby should be forthcoming.

If the couple has chosen to let this inchoate gynecological development to be known to the public, then it is good form and charitable for those around to congratulate them for the development, and to pray not only that the child be delivered in nine months, but that it be unimpaired for natural development afterwards. It would be most unwise though for the couple to announce that they already have a son (or daughter), proceed to name that child, and then push an empty pram around the neighborhood to further demonstrate their confidence and ?faith.?

But in this particular instance, there is a catch to this couple?s story: the mother has a blood condition that would kill the child, and the two options available are either to take without replacement immediately an enormous amount of blood, or else to take it more slowly over the gestation period and even beyond. The only uncertainties in the latter option are those of the machine (newly invented, untested in long service) and its human operator (aging), so the options are to either take all the blood now when the machine and its operator are known to be available, or to take it more slowly with the risk of complete breakdown of machine and/or operator before the gestation period is over.

Going back to our debt figures, at one level of street and intuitive analysis, the answer is rather simple: With the ability to pay $12 from our foreign reserves and promise of $18 billion forgiveness and a debt-free situation thereafter, emitting $12 billion so soon is quite ?tempting.? But like in all things, there are alternatives if you look hard enough, and often those alternatives are quite better than the first thing that comes to mind.

Some Debt Numbers

In her article entitled ?Understanding Nigeria?s Debt Situation? of February 27, 2005, Nigeria?s Finance Minister, Dr. Ngozi Okonjo-Iweala, had the following to say:

Nigeria's external debt stands presently at US$34 billion. About $28 billion or 85% of the debt is owed to the Paris Club of 15 creditor nations. Only 8% of the debt is owed to multilateral institutions such as the African Development Bank and the World Bank whilst the balance of 7% is owed to the London Club of commercial creditors and holders of Promissory Notes. Nigeria does not owe the IMF any money. The first fact therefore is that Nigeria's debt problem is really "a Paris Club debt problem" If Nigeria were to fully service its external debt every year, annual debt service would amount to approximately US$3 billion - $2.3 billion to the Paris club, and $0.7 billion to the multilateral and commercial creditors. The ownership structure of the debt is such that the federal government pays 75% of the debt service whilst 25% approximately is serviced by the states. Therefore, fully servicing the $3 billion every year would mean that the federal government would have very little left for the capital budget over the next 5 to 7 years as the federal government's portion of such debt service would virtually eat up all of the capital budget, especially when it is considered that we also have domestic debt service amounting to about $1.4 billion a year.


The total structure of our outstanding domestic and external debts, as well as external debt service payments since 2000 are outlined in Tables 1 and 2.

Working with the numbers quoted above in Okonjo-Iweala?s write-up required to ?fully service? our debts of $28 billion for Paris Club and $6 billion for non-Paris Club, it means that we are working with an average payback annual interest rate of 8.21% for Paris Club Debt and 11.7% for multilateral and commercial creditors.

Confining ourselves Paris Club and the easy figure of $30 billion, paying $1 billion per year will never get us out of debt (not enough to cover interest + penalties), while paying $2.3 billion, $2.37 billion, $2.42 billion, $2.62 billion, $2.86 billion, $3.2 billion and $4 billion annually (e.g. on January 1 of each year) would let us cut those years into 57, 40, 35, 25, 20, 15 and 10 years respectively. The cumulative amount of monies paid would be $133.16 billion, $96.99 billion, $86.59 billion, $67.45 billion, $57.61 billion, $50.51 billion and $42.71 billion respectively. These figures have been summarized in Table 3.

The true 60% debt relief TO NIGERIA should therefore be a combination of the amount THAT WE CAN AFFORD to pay over an acceptable period of time. If for example, we could afford to pay $30 billion over a 1 year period, but we are asked instead to emit $12 billion over that same rather short period and forget the rest for ever, then that is a GENUINE 60% debt relief, and I would advise that we pay off accordingly. If, as another example taken from above, we are somehow able to pay $4 billion annually over a 10 year period comfortably, and we are asked instead to pay either $4 billion just for 4 years (skipping the other six years entirely), then that is genuine 60% debt relief.

As an alternative approach in the latter example, even though we are ?comfortable? to pay $4 billion per year, we could even ask to pay $1.6 billion annually (which is 40% of $4 billion) for 10 year period, pledging to dedicate the rest of the $2.4 billion each year within the context of an escrow management for infrastructure, education, health and agriculture. The latter approach is of course less favorable to the creditor than to the debtor, but whose ?relief? is this anyway ?

Paramount in a genuine debt relief to us, therefore, is our own ability to pay at a rate COMFORTABLE to us, not at the rate that the creditors want. Any other ?debt relief? is a mirage, and becomes MORE ?mirage-ous? as the amount we are asked to pay increases over a shorter and shorter period.

Affording It Without Emitting Billions to Creditors At Once ? Some Proposed Plans

I have asked a number of investment advisers around: given $12 billion or $14 billion CASH, how would you invest it and what kind of rate of returns would you expect with that kind of money ? With eyes popping and some salivation, the answer invariably has been that from a portfolio of conservative to aggressive financial vehicles, a rate of return of about 20-25%, possibly higher, is almost certainly guaranteed.

With that fact in mind, therefore, here are some plans: looking at Table 3, suppose, after making the first down-payment of $2.42 billion (Plan A) or $2.62 billion (Plan B), from our reserves we INVEST at one go $14 billion (not even $12 billion) in international financial vehicles, and get at least a rate of return of 20% (the lower end of expectations). This means that we can earn $2.8 billion interest annually, enough to make our annual payments (under a genuine 60% debt relief regime) either through:

Plan A ? paying $2.42 billion annually over a 14-year period;

Plan B ? paying $2.62 billion annually over a 10 ?year period.

There might even be Plan C and Plan D still based on this $14 billion investment and certain payments amounting to $2.42 billion and $2.62 billion:

Plan C ? paying $0.97 billion annually to the creditors over a 35 year period, with $1.45 billion being set aside SPECIFICALLY for infrastructure, health, education and agriculture.

Plan D ? ditto, except that we would be paying $1.05 billion to creditors over a 25-year period, and $1.57 billion set aside annually for special projects.

In all of these plans, we must note one important fact: we still have at hand our $14 billion principal plus any interest earned over and above what was spent to achieve a particular plan.

My preference is for Plan D, with possible reduction in interest rate (to no more than 5% say), and additional monies being paid to accelerate the debt retirement in years of unusual excess crude profit.

Concluding Thoughts

The above plans are offered, based on my deep opposition to paying up so much money to our creditors all at once, particularly when we know that we have paid what we owe several times over, over all these years. For example, according to reliable information, the total amount borrowed by Nigeria from members of the Paris Club from 1965 to 2001 was of the equivalent of US$13.5 billion. By December 31, 2001, Nigeria had paid the equivalent of US$41.273 billion to service the debt but still owed the Paris Club member countries the equivalent of US$22.092 billion.

To pay up that way is really to appear as if we did not need debt relief in the first instance.

Although it is the ?politically expedient? thing to do to get rid of the debt right away by paying $12 billion ? ?so that it does not get stolen again?, some whisper - and though president Obasanjo may go down in history as having ridden Nigeria of its debt during his rule, I strongly believe that it would be an economically unwise thing to do, bearing in mind what we ourselves could do with so much money, both in bold financial investment and in productive infrastructural development. Otherwise, the child born after so much blood has been taken all at once from the mother may be permanently impaired, and money spent to keep it alive thereafter may exceed what would have been spent if the mother was less violently treated.

Furthermore, whatever decision is reached, serious, enforceable and enforced legislation must be put in place to prevent future administrations from mortgaging the future of Nigerians through debt traps in the way our previous leaders have done. For example, the present situation where about 99% of our Paris Club debt is tied up in non-ODA credits (ODA is official development assistance) is simply unconscionable, [See Appendix III ? figures outlining Paris Club treatment of Nigeria?s debt following Houston terms agreement of December 13, 2000].

I rest my case for now. Comments are welcome.